Tax reform not for the fainthearted says Peter Costello, AC

SYDNEY, 16 October 2020: Opening a keynote session about tax reform, the Hon. Peter Costello AC, Australia’s longest serving Treasurer, and the man who was instrumental in introducing GST, said, “I’ve cautioned every treasurer since not to embark upon it [tax reform] if they’re fainthearted.”

Reflecting on his 1999 ANTS tax reform package which introduced the GST, Costello said, “The underlying philosophy was this: that taxes should be efficient, simple and neutral.”

“Our argument is, it’s better to have fewer taxes, broader taxes and simpler taxes.”

Now, the discussion around GST often revolves around two factors: increasing the rate and broadening the base. Costello said that spending more on social benefits or payments, decreasing the deficit or lifting the tax-free threshold were not good enough reasons to broaden the base and increase the GST rate. But he said he would be interested in a proposal to do so, “in return for dramatically, structurally cutting top marginal tax rates.”

The next question, he said, is what you do with the revenue generated by such a move.

“If you wanted to raise the base, I would say from my own point of view, and from the public’s point of view, tell us what you’re going to do with the money, before we even entertain the issue,” he said.

“The purpose of tax is to raise enough money to accompany other social objectives, without killing the goose that laid the golden egg.”

“You need tax to run your hospitals and you need it run your pensions and you need it to run your defence force. But if you take too much your economy is weakened. And your overall outcomes will be weakened. So the public good is to raise sufficient tax to run a decent society, but not so much to interfere with economic productivity.”

Why embark on tax reform?

Costello said that, “Real reform, substantial reform, the kind of reform we saw 20 years ago, is the exception, not the rule in Australia.”

“The success of tax reform will be judged by outcomes. It’s not enough to say I had a great idea; tax reform only succeeds if it produces the better end result.”

Costello explained there was a reason meaningful tax reform only happened infrequently – “…it’s jolly hard and it takes a lot of effort and it takes a lot of time.”

In between large reform to the tax system, Costello said we should “tend the garden.”

“You’ve just got to make sure it doesn’t get too overgrown here, and it’s cut back there and it’s fertilised here.

Just because you can’t do a huge [change], doesn’t mean you shouldn’t do anything. I would tend the garden, try and keep it looking good, but know that at some point you’re going to have to do a major reno on the whole thing and get ready for that.”

Costello said that, as a body that can presumably “develop a view which is above particular interest and in a broad national interest”, The Tax Institute’s role in tax reform was that of a thought leader.

“I actually think [The Tax Institute] can do a lot, because it’s not a lobby group” he said.

“It can give an overall perspective, it can lead public opinion. And if it can do that, and come up with changes that would lead to some other public good – like in my view, a more productive economy, lower transactional costs, the sharing of those benefits back to tax payers in some tangible and meaningful way – if it can do that, then it will perform a very valuable public service.”

Peter Costello AC delivered his keynote session as part of The Tax Summit: Project Reform, an ambitious series of events, leading to a Virtual Summit in November, through which The Tax Institute is building a case for change in our tax system.

The next keynote speaker is Danielle Wood, CEO, Grattan Institute, on 22 October.